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The IBM-backed Stellar Stablecoin and the Importance of Trusts

By Matthew Hine

This week IBM announced that it was working with a company called Stronghold to release a new stablecoin – a cryptocurrency designed to have stable value – on the Stellar public blockchain network. A high-profile announcement like this is clearly good news for Stellar, but it could also indicate the start of a meaningful maturation of blockchain that may not be immediately obvious.

Stellar, conceived as a more open, decentralization-oriented spinoff of Ripple, is designed specifically for financial transactions. Of course virtually any cryptocurrency can be used to perform financial transactions in that cryptocurrency, but the creators of Stellar realized that this isn’t sufficient for real-world usage today: Cryptocurrencies are too unstable in value for wide adoption, and each cryptocurrency lives on a blockchain island that makes it virtually impossible to directly exchange with other cryptocurrencies without a trusted intermediary (which somewhat defeats the point of blockchain).

Basically, today if I want to wire $100 to my friend in Spain using the efficiency and speed of blockchain, we both have to use a cryptocurrency that we probably can’t spend, we may not want to hold, and is difficult to turn into something that we can spend and wouldn’t mind holding (ie. something like USD or EUR). So instead we use something traditional like Western Union that is slow and expensive, but lets me turn USD in Texas into EUR in Barcelona.

So to fix this problem Stellar is designed to not only carry its own cryptocurrency, but also bridge real-world “fiat” currencies (like USD or EUR) into its own native blockchain. If they can accomplish this, it will be transformative, creating a low-friction marketplace for all manner of financial services such as international remittance, Paypal-like payment services, merchant payment processing, and even cross-bank monetary transfers – all in any currency, rather than forcing users to take on the complexity and risk of a particular crypto.

So how does Stellar build this bridge? Their concept is providing a protocol-level system whereby “trusts” can issue blockchain representations of real-world fiat currency that users can then transact just as frictionlessly as any other cryptocurrency – a crypto-USD. A trust can be any company that is willing to accept a currency (whether fiat or crypto) and store it “in trust” in order to back 1-to-1 the crypto representation of that currency. That is, they accept 1 USD and issue 1 USD-crypto on Stellar – or accept 1 USD-crypto and release 1 USD. The trust could be a bank, or a money changer, or a payment service.

Once a financial service company becomes a trust, they get access to the Stellar marketplace while providing yet another useful bridge for users between the Stellar marketplace and the outside world. And when many trusts are in place, providing a variety of financial services in a variety of currencies (or in fact virtually any fungible asset like stocks, gold, oil, or carbon credits) to the network, that Stellar marketplace becomes extremely powerful. Stronghold, working with IBM, is creating the first USD trust for the network.

Blockchains (or more generally, DLTs) that seek to create useful economic marketplaces and make real world commerce more efficient may need to adopt something like this trust model in order to move beyond idealistic visions of a world that operates in their single cryptocurrency. Stellar may have taken the first significant step in this direction, but it is unlikely to be the last.